Walgreens Co. v. Fayette County Property Valuation Administrator, File No. K12-S-21; K13-S-38, Order No. K-24624 (KBTA Mar. 26, 2014), aff’d, No. 14-CI-01566 (Fayette Cir. Ct. Feb. 18, 2015), aff’d, No. 2015-CA-000407 (Ky. App. Sept. 23, 2016).

In Walgreens Co. v. Fayette County Property Valuation Administrator, the Kentucky Court of Appeals affirmed the Fayette Circuit Court which affirmed a Final Order of the Kentucky Board of Tax Appeals (“Board”) finding that the value of a build-to-suit lease must be taken into consideration when assessing a property at its fair cash value. The Court of Appeals determined that the Property Value Administrator’s (“PVA”) assessment, which included the income generated under a 75-year lease, was consistent with KRS 132.191(2)(b) in estimating the “present value of future benefits.”

Taxpayers, Walgreens Co. (“Walgreens”) and Wilgreen LLC (“Wilgreen”) challenged a property tax assessment for one of their retail locations in Fayette County, Kentucky. The PVA valued the property at $5,086,000 for tax years 2012 and 2013, using the income approach. Walgreens claimed the property should be valued at $4,397,600. Both parties obtained appraisals and Walgreens further reduced its amount to $2,600,000 based on its appraisal, while the PVA increased his valuation to $5,960,000.

Wilgreen bought the property at issue in 2007 for $6,275,000. Walgreens has a build-to-suit 75-year lease on the property. The property is listed for sale, subject to the lease, for $6,995,530. Walgreens argued that despite the higher list price, the PVA should only value the property for the fee simple interest only and not include the value of the lease. Walgreens presented three separate witnesses who explained that it was inappropriate to include the value of the lease in the property value, as the property value itself was separate from the fair market value. However, the Board determined that none of the properties the witnesses relied on in their assessments was comparable to this particular property based on its location, guaranteed tenant occupancy and other relevant factors.

The PVA also presented three witnesses who testified that the value of the property should include the lease. They used a combination of the income method, the income capital method and comparison of local properties, including a store that was of, similar size, locale, and had a build-to-suit long term lease.

On appeal, the Court of Appeals held that “Walgreens had the burden of showing that the PVA[] … overvalued the property. The Board found that Walgreens failed to meet that burden. We agree.” The Court stated that “Walgreens attempted to show this property was overvalued by relying on properties very different from the present. None of the properties Walgreens relied on is located on [the same] Road or anywhere similar. Walgreens compared apples to oranges.”

Comparable properties do not need to be identical. And, when the taxpayer’s appraiser highlights similar elements between the subject property and the comparables, the taxpayer should overcome the PVA’s assessment; the Board and the Courts should recognize this.